Today’s Blog – Tuesday 19th July 2016

As Turkey’s 21st Century Sultan continues cracking down on any opponents he can think of, the recent failed coup (if in fact it was a real coup and not an Erdogan ploy) failed to excite oil markets much.

The Bosphorus Straits were temporarily closed and a reasonably material ~3% of the world’s oil production flows through these on a daily basis. Given inventory levels, it seems that much longer closures – which would only likely result from Turkey becoming a failed State – would be needed to really affect oil markets.

As Turkey moves more towards authoritarianism, Islamism, Erdoganism (and possibly some other unpleasant -isms), the longer term affect on oil markets will likely be on the demand side rather than supply side. That is a State of the type that Erdogan is pushing Turkey to become, will grow less than it otherwise could (or even stagnate) and hence have a lower demand for crude.

If its growing failures cause problems with its neighbours – e.g. letting a much bigger flow of refugees through to Europe – then this demand side issue would spread.

Russia’s plans to move gas to Europe via Turkey – through the mooted TurkStream pipeline – could find political support from Erdogan as he and Putin become closer friends in the dictator’s club – but again economic weakness would reduce the country’s call for gas and the ability to pay for it.

Commodity prices

Crude prices fell overnight. Brent was down ~1.3% to US$46.99 and WTI fell ~1.6% to US$45.20. With Middle Eastern “events” not worrying the market, it was US “numbers” that caused concern – reports of a counter-seasonal build of crude inventories at Cushing, Oklahoma.

Henry Hub also declined – by ~0.7% to US$2.74.

LNG and international gas

Bloomberg recently reported that Japan’s competition regulator, its Fair Trade Commission, was reviewing certain potential anti-competitive elements of the LNG contracts which supply the country. In particular, “destination clauses” which mean that buyers have to take gas at certain delivery points in the country, practically mean that buyers cannot on-sell cargoes to others.

In our view these clauses are clearly prima facie anti-competitive and the LNG sellers will fight a losing battle to try and hold onto them. Rather, the smarter operators in the sector should embrace growing liberalisation and make a virtue (and a profit centre) out of it.

Assuming a Japanese victory on this front, the removal of destination clauses – by regulation or agreement between buyer and seller, will increase short/medium term spot LNG supplies and hence reduce prices.

Domestic gas

The ongoing problems of high electricity and gas prices in South Australia arguably primarily induced by the high degree of renewable generation in that State (caused by intrinsically windy natural conditions, not windy State politicians) continue to reverberate.

SA’s Energy Minister Tom Koutsantonis has effectively called for a systemic review of the national electricity market – which seems reasonable to us in that it was designed more than two decades ago. If COAG follows through on this, there would almost certainly be consequences for gas markets as well.

Koutsantonis has also become the public target of claims by the Northern Territory’s Chief Minister Adam Giles, who has effectively accused him of not supplying enough subsidies to bring the NEGI pipeline to South Australia instead of Queensland.

Given that NEGI is highly likely to be a financial failure given the lack of gas in the NT (and the current suspension of all exploration in the Territory), SA citizens should be pleased in the forbearance of their Government in avoiding any temptation to support the ill-fated pipeline venture.

Company news – Oil Search (OSH)

Recent media comments on Exxon Mobil’s trumping of OSH’s takeover offer for InterOil have shared our views that this outcome is in fact a positive for OSH, not a loss.

Consensus also seems to be that it would not be sensible for Total to try and join the fray – with the caveat that good sense does not always prevail when it comes to boardroom egos, as Curtis Island vividly illustrates.

Company news – Woodside Petroleum (WPL)

This news does not really concern WPL – but rather its previous CEO, Don Voelte. Readers might be somewhat surprised to hear that the extremely delicate flower that is Mr Voelte was so hurt by some comments made by the ABC over the battle for junior Nexus Petroleum (when Mr Voelte was Chairman thereof) that he is now suing the ABC for slander and damage to his otherwise spotless reputation.

The ABC’s QC, Stuart Littlemore, noted that: “There are rich and powerful people who think everything is about them…it is so far over the top as to be ludicrous.”

Someone far un-kinder than us might suggest that WPL employees might find some reasons to smile over this story.

Quote of the day

We have oft lamented the spinelessness of politicians in calling for “moratoriums” over fracking, etc. The use of this apparently reasonable word is a classic case of a political abuse of the English language in ways that George Orwell would instantly recognise.

The use of the word has now spread, with Pauline Hanson now calling for the following policy response to Muslim’s entering the country: